FIRSTCITY FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2004 or


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0243729 (I.R.S. Employer Identification No.)

6400 Imperial Drive,
Waco, TX		76712
(Address of Principal Executive Offices)		(Zip Code)

(254) 751-1750
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares of common stock, par value $.01 per share, outstanding at August 13, 2004 was 11,235,687.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)


	June 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Cash and cash equivalents	$	3,823		$	2,745
Portfolio Assets, net		11,238			4,525
Loans receivable from Acquisition Partnerships held for investment		20,333			17,313
Equity investments		85,359			73,146
Deferred tax asset, net		20,101			20,101
Service fees receivable from affiliates		1,033			1,390
Other assets, net		13,528			6,769
Net assets of discontinued operations		5,527			6,150

Total Assets	$	160,942		$	132,139

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable to affiliates	$	97,856		$	88,628
Notes payable other		4,664			2,432
Preferred stock subject to mandatory redemption, including accumulated dividends in arrears of $1,326 and $1,193 at June 30, 2004 and December 31, 2003, respectively, (par value $.01; redemption value of $21 per share; 2,000,000 shares authorized; 126,291 shares issued and outstanding)		3,978			3,846
Minority interest		6,516			3,972
Other liabilities		12,013			4,292

Total Liabilities		125,027			103,170
Commitments and contingencies (note 10)
Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued and outstanding: 11,235,687 and 11,193,687, respectively)		112			112
Paid in capital		99,288			99,168
Accumulated deficit		(65,775	)		(73,923	)
Accumulated other comprehensive income		2,290			3,612

Total Stockholders’ Equity		35,915			28,969

Total Liabilities and Stockholders’ Equity	$	160,942		$	132,139

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues:
Servicing fees from affiliates	$	3,716		$	4,086		$	6,748		$	7,593
Gain on resolution of Portfolio Assets		162			272			237			967
Equity in earnings of investments		7,757			6,933			16,969			9,024
Interest income from affiliates		617			911			1,061			1,826
Interest income — other		51			157			136			345
Other income		444			254			1,782			616

Total revenues		12,747			12,613			26,933			20,371
Expenses:
Interest and fees on notes payable to affiliates		2,268			1,804			4,797			3,695
Interest and fees on notes payable — other		102			52			171			114
Interest on shares subject to mandatory redemption		67			—			133			—
Salaries and benefits		3,477			4,098			7,554			7,594
Provision for (recovery of) loan and impairment losses		22			(56	)		22			(22	)
Occupancy, data processing, communication and other		1,785			1,736			3,237			3,730

Total expenses		7,721			7,634			15,914			15,111
Earnings from continuing operations before income taxes and minority interest		5,026			4,979			11,019			5,260
Provision for income taxes		(471	)		(133	)		(583	)		(254	)

Earnings from continuing operations before minority interest		4,555			4,846			10,436			5,006
Minority interest		(1,006	)		(609	)		(2,038	)		(788	)

Earnings from continuing operations		3,549			4,237			8,398			4,218
Loss from discontinued operations		(250	)		(420	)		(250	)		(420	)

Net earnings		3,299			3,817			8,148			3,798
Accumulated preferred dividends in arrears		—			(67	)		—			(133	)

Net earnings to common stockholders	$	3,299		$	3,750		$	8,148		$	3,665

Basic earnings per common share are as follows:
Earnings from continuing operations	$	0.31		$	0.37		$	0.75		$	0.37
Discontinued operations		(0.02	)		(0.04	)		(0.02	)		(0.04	)
Net earnings to common stockholders	$	0.29		$	0.33		$	0.73		$	0.33
Weighted average common shares outstanding		11,235			11,204			11,216			11,203
Diluted earnings per common share are as follows:
Earnings from continuing operations	$	0.30		$	0.37		$	0.71		$	0.37
Discontinued operations		(0.02	)		(0.04	)		(0.02	)		(0.04	)
Net earnings to common stockholders	$	0.28		$	0.33		$	0.69		$	0.33
Weighted average common shares outstanding		11,820			11,204			11,806			11,203

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


											Accumulated
	Number of										Other			Total
	Common			Common		Paid in		Accumulated			Comprehensive			Stockholders’
	Shares			Stock		Capital		Deficit			Income			Equity
Balances, December 31, 2002		11,195,076		$	112	$	98,934	$	(82,977	)	$	2,683		$	18,752
Issuance of common stock in exchange for redeemable preferred stock		8,200			—		75		—			—			75
Issuance of shares through employee stock purchase plan		1,395			—		3		—			—			3
Exercise of common stock options		6,250			—		12		—			—			12
Refund of unconverted common stock		(17,234	)		—		144		—			—			144
Comprehensive income:
Net earnings for 2003		—			—		—		9,187			—			9,187
Foreign currency items		—			—		—		—			2,157			2,157
Unrealized net loss on securitization		—			—		—		—			(1,228	)		(1,228	)

Total comprehensive income															10,116

Preferred dividends		—			—		—		(133	)		—			(133	)

Balances, December 31, 2003		11,193,687			112		99,168		(73,923	)		3,612			28,969
Exercise of common stock options		42,000			—		120		—			—			120
Comprehensive income:
Net earnings for the first six months of 2004		—			—		—		8,148			—			8,148
Foreign currency items		—			—		—		—			(1,323	)		(1,323	)
Unrealized net gain on securitization		—			—		—		—			1			1

Total comprehensive income		—			—		—		—			—			6,826

Balances, June 30, 2004		11,235,687		$	112	$	99,288	$	(65,775	)	$	2,290		$	35,915

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six Months Ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net earnings	$	8,148		$	3,798
Adjustments to reconcile net earnings to net cash used in operating activities:
Loss from discontinued operations		250			420
Proceeds from resolution of Portfolio Assets		706			4,496
Gain on resolution of Portfolio Assets		(237	)		(967	)
Purchase of Portfolio Assets and loans receivable, net		(13,372	)		(5,172	)
Provision for (recovery of) loan and impairment losses		22			(22	)
Equity in earnings of investments		(16,969	)		(9,024	)
Proceeds from performing Portfolio Assets and loans receivable, net		3,186			1,799
Capitalized interest and costs on Portfolio Assets and loans receivable		(92	)		(126	)
Depreciation and amortization		409			393
(Increase) decrease in service fees receivable from affiliate		357			(396	)
Increase in other assets		(2,217	)		(927	)
Change in estimated notes payable to affiliates		(759	)		—
Increase in other liabilities		4,334			1,082

Net cash used in operating activities		(16,234	)		(4,646	)

Cash flows from investing activities:
Purchase of minority interest by consolidated subsidiary		—			(1,399	)
Property and equipment, net		(124	)		(625	)
Contributions to Acquisition Partnerships and Servicing Entities		(8,552	)		(7,275	)
Distributions from Acquisition Partnerships and Servicing Entities		13,248			12,778

Net cash provided by investing activities		4,572			3,479

Cash flows from financing activities:
Borrowings under notes payable to affiliates		29,152			13,459
Borrowing under notes payable — other		2,664			2,720
Payments of notes payable to affiliates		(19,136	)		(13,587	)
Payments of notes payable — other		(432	)		(1,148	)
Payments for tender of redeemable preferred stock		—			(50	)
Proceeds from issuance of common stock		120			2

Net cash provided by financing activities		12,368			1,396

Net cash used in continuing operations		706			229
Net cash provided by (used in) discontinued operations		372			(352	)

Net increase (decrease) in cash and cash equivalents	$	1,078			(123	)
Cash and cash equivalents, beginning of period		2,745			4,118

Cash and cash equivalents, end of period	$	3,823		$	3,995

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	2,864		$	3,198
Income taxes		242			254
Non-cash financing activities:
Dividends accumulated and not paid on preferred stock		133			133
Balance of redeemable preferred stock and associated dividends relinquished in recapitalization transaction		—			75

See accompanying notes to consolidated financial statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Dollars in thousands, except per share data)

(1) Basis of Presentation, Earnings per Common Share and Stock-Based Compensation

FirstCity Financial Corporation (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States and Mexico, with a presence in France and South America. At June 30, 2004, the Company was engaged in two principal reportable segments: (i) portfolio asset acquisition and resolution and (ii) consumer lending through the Company’s minority investment in Drive Financial Services LP (“Drive”). The portfolio asset acquisition and resolution business involves acquiring portfolios of assets or single assets (collectively referred to as “Portfolio Assets”) at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries. Drive is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers.

The unaudited consolidated financial statements of FirstCity Financial reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at June 30, 2004, its results of operations for the three-and six month periods ended June 30, 2004 and 2003 and cash flows for the six-month periods ended June 30, 2004 and 2003.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased portfolio assets used in the calculation of net gain on resolution of portfolio assets, interest rate environments, valuation of the deferred tax asset, and prepayment speeds and collectibility of loans held in inventory, in securitization trusts and held for investment. Actual results could differ materially from those estimates.

Basic net earnings per common share calculations are based upon the weighted average number of common shares outstanding. Earnings included in the earnings per common share calculation are reduced by minority interest and increased for preferred stock dividends. Potentially dilutive common share equivalents include warrants and stock options in the diluted loss per common share calculations.

At June 30, 2004, the Company has three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the following table represents the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net earnings to common stockholders, as reported	$	3,299		$	3,750		$	8,148		$	3,665
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(109	)		(34	)		(130	)		(67	)

Pro forma net earnings to common stockholders	$	3,190		$	3,716		$	8,018		$	3,598

Net earnings per common share:
Basic — as reported	$	0.29		$	0.33		$	0.73		$	0.33

Basic — pro forma	$	0.28		$	0.33		$	0.71		$	0.32

Diluted — as reported	$	0.28		$	0.33		$	0.69		$	0.33

Diluted — pro forma	$	0.27		$	0.33		$	0.68		$	0.32

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(2) Restructure, Liquidity and Capital Resources

The Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed to acquire Portfolios (“Acquisition Partnerships”), retirement of and dividends on preferred stock, and other investments by FirstCity. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company’s subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

In December 2002, FirstCity completed a recapitalization in which holders of redeemable preferred stock, par value $.01 per share, (“New Preferred Stock”) exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million in cash. As a result, common equity was increased by $18.9 million. During the first quarter of 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock and $50,000 in cash. FirstCity also recorded a $4 million gain in December 2002 from the release of its guaranty of Drive’s indebtedness to BoS(USA) Inc. (“BoS(USA)”). BoS(USA)’s warrant to purchase 1,975,000 shares of non-voting Common Stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and notes payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of incentive servicing fees related to certain Portfolios in Mexico. FirstCity valued the loans at the inception date using an imputed interest rate of 4.56% based on the Company’s cost of funds on that date. During the first quarter of 2004, the Company reduced the estimated carrying value of these loans based on an imputed interest rate of 6.94% and revised cash flow projections. FirstCity recorded the change in estimate of $.8 million to other income. At June 30, 2004, these notes had a combined balance of $.5 million and mature in December 2011. The Company evaluates the contingent amount of these outstanding notes on a quarterly basis and will make adjustments to the estimated liability as changes in estimated cash flows supporting these notes change.

As a part of the recapitalization, Bank of Scotland provided a non-recourse loan in the amount of $16 million to FirstCity, which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity’s debt to the Bank of Scotland (together with BoS(USA), the “Senior Lenders”). The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity’s remaining 31% interest in Drive) and other assets of FirstCity Consumer Lending Corporation (“Consumer Corp.”) as are necessary and only to the extent to allow the Senior Lenders to realize the security interest in the 20% interest in Drive. In connection with the $16 million loan, the Company agreed to pay a contingent fee to Bank of Scotland equal to 20% of all amounts received by the Company upon any sale of the Company’s 20% interest in Drive or any receipt of distributions from Drive related to the 20% ownership interest, once such payments exceed $16 million in the aggregate. See note 10 for further discussion and accounting treatment of this contingent fee.

In connection with the recapitalization, the Senior Lenders refinanced the remainder of the Company’s debt facilities ($37 million outstanding at June 30, 2004). The Senior Lenders provided additional financing to FirstCity, increasing the total commitment under the acquisition facility to $59 million, consisting of (a) a $5 million revolving credit loan and (b) an acquisition term loan in an amount up to $54 million. The aggregate amount of outstanding loans under the total commitment by the Senior Lenders for the refinancing and the new financing at any time may not exceed $77 million. Effective as of March 31, 2004, the Company and the Senior Lenders amended the acquisition term loan facility providing for a total amount of term loans to be made up to $54 million in the aggregate to (i) make it into a revolving loan facility providing for a maximum principal balance of loans outstanding at any time of $45 million, (ii) allow loans to be made in Euros up to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars, (iii) allow loans to be made for acquisition of Portfolio Assets originated outside the United States of up to $22.5 million, (iv) provide for an interest rate of Libor plus 3.50%, (v) provide for the non-utilization fee to increase from 0.25% to 0.375% of the unused balance of the revolving acquisition facility, (vi) provide for distribution of 35% of collections from Asset Portfolios to the Company, provided that the aggregate outstanding principal balances of all loans under the facility does not exceed 65% of the net present value of FirstCity’s interest in Portfolio Assets in Acquisition Partnerships pledged to secure the acquisition facility, and (vii) provide for other modifications that would facilitate the use of the acquisition facility in the United States and other countries. The amended facility continues to provide that the aggregate amount of all outstanding loans under the loan facilities refinanced with the Senior Lenders in December 2002 and the amended acquisition facility and the related $5 million revolving loan are limited to $77 million.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

ability to acquire approximately 4.86% of the Company’s voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

In the third quarter of 1999, dividends on the Company’s New Preferred Stock were suspended. At June 30, 2004, accumulated dividends in arrears on New Preferred Stock totaled $1.3 million, or $10.50 per share. The accumulated dividends in arrears were paid on July 29, 2004 to the holders of record as of July 22, 2004. The dividend covered the period from July 1, 1999 through June 30, 2004. Because the dividend was in excess of 25% of the value of the New Preferred Stock, the ex dividend date for the security was July 30, 2004, the day after the payable date. The Company halted payment of dividends on New Preferred Stock as of July 1, 1999, due to liquidity constraints resulting from financial difficulties the Company experienced at the time. Since then, the Company’s bank lending agreements have prohibited the payment of any dividends on New Preferred Stock. Giving consideration to its successful recapitalization in December of 2002, and resulting improvement in its balance sheet, liquidity and earnings, the Company recently sought and received a waiver of the restrictions on dividend payments from its lender.

There are currently 126,291 shares of New Preferred Stock outstanding. The issue, which matures in September 2005, has a $21.00 per share liquidation preference and $2.10 per share annual dividend rate. The Company expects to make quarterly dividend payments of $.525 per share beginning in October of 2004, until the shares are retired.

The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill (the “Cargill Facility”). This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At June 30, 2004, approximately $24.9 million was outstanding under this facility.

In September 2003, FirstCity entered into a Portfolio acquisition facility line of credit with Greenwich Capital Financial Products, Inc., which provides borrowings up to $30 million. The facility obligation was zero at June 30, 2004 and matures September 2004.

Management believes that the loan facilities provided by the Senior Lenders along with the liquidity from the Cargill Facility, the related fees generated from the servicing of assets and equity distributions from existing Acquisition Partnerships and wholly owned portfolios will allow the Company to meet its obligations as they come due during the next twelve months.

(3) New Accounting Pronouncements

In November 2003, the FASB issued Staff Position, No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“Staff Position 150-3”). Staff Position 150-3 defers the application of various provisions of SFAS 150 for specified mandatorily redeemable noncontrolling interests in consolidated limited-life entities. FirstCity has minority interests in various limited-life partnerships with a carrying value of $1.4 million at June 30, 2004. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at June 30, 2004 is $.9 million.

In December 2003, the Accounting Standards Executive Committee issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 limits the yield that may be accreted on a loan portfolio to the excess of undiscounted expected cash flows over the initial investment in the loan portfolio. FirstCity will be required to account for all loans acquired after 2004 in accordance with SOP 03-3. For loans acquired prior to January 1, 2005, FirstCity will adopt the provisions of SOP 03-3 on a prospective basis.

In December 2003, the FASB issued a revision to Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46R”), which was originally issued in January 2003. FIN 46R provides guidance on the consolidation of certain entities when control exists through other than voting (or similar) interests and was effective immediately with respect to entities created after January 31, 2003. For certain special purpose entities created prior to February 1, 2003, FIN 46R became effective for financial statements issued after December 15, 2003. For all other entities created prior to February 1, 2003, FIN 46R became effective January 1, 2004.

FIN 46R requires consolidation by the majority holder of expected residual gains and losses of the activities of a variable interest entity (“VIE”). FirstCity holds significant variable interests in certain Acquisition Partnerships, which would be characterized as

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

VIE’s. However, FirstCity is not deemed to be the primary beneficiary of any of these entities based on the criteria set forth in FIN46R. At June 30, 2004, FirstCity’s maximum exposure to loss as a result of its involvement with the VIE’s is $34 million.

(4) Discontinued Operations

The Company recorded a provision of $.3 million in the first six months of 2004 and $.4 million in the first six months of 2003 for additional losses from discontinued operations. The provisions primarily relate to reductions in anticipated future cash flows from securitization trusts due to increased prepayment speeds and losses. The net assets from discontinued operations consist of the following:


	June 30,			December 31,
	2004			2003
Estimated future gross cash receipts on residual interests in securitizations	$	5,777		$	6,399
Accrual for loss on operations and disposal of discontinued operations, net		(250	)		(249	)

Net assets of discontinued operations	$	5,527		$	6,150

The only assets remaining from discontinued operations are the investment securities resulting from the retention of residual interests in securitization transactions. Although the liquidation or run-off of these investment securities will last longer than one year, the Company is contractually obligated to service the securitized assets. The Company has considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. The cash flows are collected over a period of time and are valued using prepayment assumptions of 29% to 32% for fixed rate loans and 23% to 25% for variable rate loans. Overall loss rates are estimated from 2% to 13% of collateral.

(5) Portfolio Assets

Portfolio Assets are summarized as follows:


	June 30,			December 31,
	2004			2003
Non-performing Portfolio Assets	$	39,176		$	27,071
Performing Portfolio Assets		2,318			2,682
Real estate Portfolios		283			283

Total Portfolio Assets		41,777			30,036
Adjusted purchase discount required to reflect Portfolio Assets at carrying value		(30,539	)		(25,511	)

Portfolio Assets, net	$	11,238		$	4,525

Portfolio Assets are pledged to secure notes payable that are non-recourse to FirstCity or any affiliate other than the entity that incurred the debt.

(6) Loans Receivable from Acquisition Partnerships Held for Investment

Loans receivable from Acquisition Partnerships held for investment consist primarily of loans from certain partnerships located in Mexico and are summarized as follows:


	June 30,		December 31,
	2004		2003
Latin America	$	17,721	$	13,351
Europe		1,169		2,604
Domestic		1,443		1,358

	$	20,333	$	17,313

There were no provisions recorded on these loans during the second quarter of 2004 and 2003. The loans receivable from Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by affiliates of the investors to the partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Equity method losses which were recorded to reduce the loans and interest receivable from the Mexican partnerships were $.5 million and $1.6 million during the first six months of 2004 and 2003, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee.

(7) Equity Investments

The Company has investments in Acquisition Partnerships and their general partners and investments in servicing entities that are accounted for under the equity method. The condensed combined financial position and results of operations of the Acquisition Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below:

Condensed Combined Balance Sheets


	June 30,		December 31,
	2004		2003
Assets	$	507,185	$	525,493

Liabilities	$	433,814	$	441,677
Net equity		73,371		83,816

	$	507,185	$	525,493

Equity investment in Acquisition Partnerships	$	55,088	$	53,098
Equity investment in servicing entities		4,447		4,381

	$	59,535	$	57,479

Condensed Combined Summary of Operations


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Proceeds from resolution of Portfolio Assets	$	63,297	$	60,610	$	125,632	$	118,193
Gain on resolution of Portfolio Assets		22,140		22,245		42,709		43,234
Interest income on performing Portfolio Assets		2,265		1,983		5,165		4,128
Net earnings (loss)		811		17,080		16,855		(3,958	)

Equity in earnings of Acquisition Partnerships	$	2,492	$	4,114	$	6,337	$	5,128
Equity in earnings of servicing entities		147		103		477		319

	$	2,639	$	4,217	$	6,814	$	5,447

The assets and equity of the Acquisition Partnerships and equity investments in the Acquisition Partnerships are summarized by geographic region below. The WAMCO Partnerships represent limited partnerships and limited liability companies in which the Company has a common ownership with Cargill. MinnTex Investment Partners LP is considered to be a significant subsidiary of FirstCity.


	June 30,		December 31,
	2004		2003
Assets:
Domestic:
WAMCO Partnerships	$	199,228	$	205,134
MinnTex Investment Partners LP		1,162		1,530
Other		10,199		10,164
Latin America		201,986		186,431
Europe		94,610		122,234

	$	507,185	$	525,493

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)


	June 30,			December 31,
	2004			2003
Equity (deficit):
Domestic:
WAMCO Partnerships	$	87,999		$	84,589
MinnTex Investment Partners LP		1,064			1,418
Other		6,080			6,218
Latin America		(89,896	)		(86,412	)
Europe		68,124			78,003

	$	73,371		$	83,816

Equity investment in Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	37,281		$	33,413
MinnTex Investment Partners LP		351			514
Other		3,024			3,037
Latin America		995			1,021
Europe		13,437			15,113

	$	55,088		$	53,098

Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships are summarized by geographic region below.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues:
Domestic:
WAMCO Partnerships	$	8,415		$	11,689		$	14,849		$	18,041
MinnTex Investment Partners LP		2,274			3,452			4,804			6,708
Other		4			30			48			39
Latin America		6,574			5,131			10,812			12,137
Europe		7,411			4,420			17,877			11,446

	$	24,678		$	24,722		$	48,390		$	48,371

Net earnings (loss):
Domestic:
WAMCO Partnerships	$	4,450		$	6,889		$	7,019		$	10,256
MinnTex Investment Partners LP		2,031			3,051			4,284			5,911
Other		(202	)		(94	)		(384	)		(231	)
Latin America		(9,429	)		4,782			(5,729	)		(26,735	)
Europe		3,961			2,452			11,665			6,841

	$	811		$	17,080		$	16,855		$	(3,958	)

Equity in earnings (loss) of Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	1,980		$	2,251		$	3,247		$	3,685
MinnTex Investment Partners LP		671			1,007			1,414			1,950
Other		(57	)		6			(118	)		(24	)
Latin America		(891	)		390			(779	)		(1,670	)
Europe		789			460			2,573			1,187

	$	2,492		$	4,114		$	6,337		$	5,128

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Combining statements of operations for the WAMCO Partnerships for the three and six month periods ended June 30, 2004 and 2003 follow. FC Properties, Ltd. (“FC Properties”), WAMCO XXVIII, Ltd. (“WAMCO XXVIII”) and WAMCO XXX, Ltd. (“WAMCO XXX”) are considered to be significant subsidiaries of FirstCity.

Three Months Ended June 30, 2004


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	2,256		$	4,520		$	2,103		$	16,169		$	25,048
Cost of Portfolio Assets resolved		697			3,677			1,553			12,188			18,115

Gain on resolution of Portfolio Assets		1,559			843			550			3,981			6,933
Interest income on performing Portfolio Assets		—			93			—			1,381			1,474
Interest and fees expense — affiliate		—			(114	)		—			(390	)		(504	)
Interest and fees expense — other		—			(81	)		(111	)		(461	)		(653	)
Provision for loan and impairment losses		—			(35	)		—			(29	)		(64	)
Service fees — affiliate		(67	)		(171	)		(80	)		(700	)		(1,018	)
General, administrative and operating expenses		(1,322	)		82			(99	)		(387	)		(1,726	)
Other income, net		1			1			1			5			8

Net earnings	$	171		$	618		$	261		$	3,400		$	4,450

Three Months Ended June 30, 2003


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	5,740		$	6,276		$	10,923		$	7,657		$	30,596
Cost of Portfolio Assets resolved		1,454			4,773			8,300			6,195			20,722

Gain on resolution of Portfolio Assets		4,286			1,503			2,623			1,462			9,874
Interest income on performing Portfolio Assets		—			368			—			1,041			1,409
Interest and fees expense — affiliate		—			(164	)		(119	)		(282	)		(565	)
Interest and fees expense — other		—			(189	)		(225	)		(149	)		(563	)
Provision for loan and impairment losses		—			(62	)		—			(20	)		(82	)
Service fees — affiliate		(172	)		(230	)		(359	)		(401	)		(1,162	)
General, administrative and operating expenses		(1,955	)		(129	)		(178	)		(166	)		(2,428	)
Other income, net		—			3			4			399			406

Net earnings	$	2,159		$	1,100		$	1,746		$	1,884		$	6,889

Six Months Ended June 30, 2004


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	2,943		$	6,572		$	6,453		$	29,493		$	45,461
Cost of Portfolio Assets resolved		948			5,190			4,923			22,629			33,690

Gain on resolution of Portfolio Assets		1,995			1,382			1,530			6,864			11,771
Interest income on performing Portfolio Assets		—			153			—			2,908			3,061
Interest and fees expense — affiliate		—			(228	)		—			(890	)		(1,118	)
Interest and fees expense — other		—			(185	)		(244	)		(853	)		(1,282	)
Provision for loan and impairment losses		—			(70	)		—			(581	)		(651	)
Service fees — affiliate		(88	)		(263	)		(232	)		(1,290	)		(1,873	)
General, administrative and operating expenses		(1,988	)		44			(208	)		(754	)		(2,906	)
Other income, net		2			2			3			10			17

Net earnings	$	(79	)	$	835		$	849		$	5,414		$	7,019

Six Months Ended June 30, 2003


	FC			WAMCO			WAMCO			Other
	Properties			XXVIII			XXX			Partnerships			Combined
Proceeds from resolution of Portfolio Assets	$	5,972		$	9,257		$	21,556		$	9,700		$	46,485
Cost of Portfolio Assets resolved		1,493			6,914			16,116			7,671			32,191

Gain on resolution of Portfolio Assets		4,479			2,343			5,443			2,029			14,294
Interest income on performing Portfolio Assets		—			778			—			2,154			2,932
Interest and fees expense – affiliates		—			(326	)		(595	)		(599	)		(1,520	)
Interest and fees expense – other		—			(410	)		(225	)		(332	)		(967	)
Provision for loan losses		—			(174	)		—			(352	)		(526	)
Service fees – affiliate		(179	)		(382	)		(711	)		(547	)		(1,819	)
General, administrative and operating expenses		(2,101	)		(202	)		(308	)		(342	)		(2,953	)
Other income, net		—			5			7			803			815

Net earnings	$	2,199		$	1,632		$	3,611		$	2,814		$	10,256

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Statements of operations for MinnTex Investment Partners LP for the three and six month periods ending June 30, 2004 and 2003 follow:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Proceeds from resolution of Portfolio Assets	$	2,368		$	3,928		$	5,052		$	7,817
Cost of Portfolio Assets resolved		95			477			250			1,112

Gain on resolution of Portfolio Assets		2,273			3,451			4,802			6,705
Service fees — affiliate		(237	)		(393	)		(505	)		(782	)
General, administrative and operating expenses		(6	)		(8	)		(15	)		(15	)
Other income		1			1			2			3

Net earnings	$	2,031		$	3,051		$	4,284		$	5,911

FirstCity also has an investment in Drive that is accounted for under the equity method. The condensed consolidated financial position and results of operations of Drive are summarized below:

Condensed Consolidated Balance Sheets


	June 30,			December 31,
	2004			2003
Cash	$	32,568		$	19,013
Restricted cash		134,517			47,623
Retail installment contracts, net		861,461			623,389
Residual interests in securitizations		19,637			29,094
Other assets		25,853			19,711

Total assets	$	1,074,036		$	738,830

Notes payable	$	986,861		$	683,758
Other liabilities		20,518			14,631

Total liabilities		1,007,379			698,389
Net equity		66,657			40,441

	$	1,074,036		$	738,830

Equity investment in Drive	$	25,824		$	15,667
Minority interest		(5,160	)		(3,131	)

Net investment in Drive	$	20,664		$	12,536

Condensed Consolidated Summary of Operations


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Finance and other interest income	$	71,138	$	46,182	$	131,581	$	85,485
Interest expense		9,903		8,104		19,111		14,297

Net interest margin		61,235		38,078		112,470		71,188

Provision for credit losses on retail installment contracts		32,295		15,864		56,795		30,028
Impairment of residual interests in securitizations, including servicing asset		—		1,240		—		2,457

Net interest margin after provision for credit losses and impairments		28,940		20,974		55,675		38,703

Other revenues:
Servicing income		6,672		5,837		13,857		11,429
Other income		1,036		572		1,977		1,126

Total other revenues		7,708		6,409		15,834		12,555

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Costs and expenses:
Salaries and benefits		8,302			10,605			18,018			23,086
Servicing expense		8,872			7,019			17,528			13,453
Occupancy, data processing, communication, and other		6,262			2,748			9,750			5,218

Total costs and expenses		23,436			20,372			45,296			41,757

Net income	$	13,212		$	7,011		$	26,213		$	9,501

Equity in earnings of Drive	$	5,118		$	2,716		$	10,155		$	3,577
Minority interest		(1,023	)		(543	)		(2,029	)		(715	)

Net equity in earnings of Drive.	$	4,095		$	2,173		$	8,126		$	2,862

(8) Segment Reporting

The Company is engaged in two reportable segments: (i) Portfolio Asset acquisition and resolution; and (ii) consumer lending. These segments have been segregated based on products and services offered. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The consumer lending business is conducted through the Company’s equity investment in Drive. Drive is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers. The following is a summary of results of operations for each of the segments and reconciliation to earnings (loss) from continuing operations for the three months and the six months ended June 30, 2004 and 2003.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004		2003
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	3,716		$	4,086		$	6,748	$	7,593
Gain on resolution of Portfolio Assets		162			272			237		967
Equity in earnings of investments		2,639			4,217			6,814		5,447
Interest income		667			1,067			1,196		2,169
Other		286			181			1,417		483

Total		7,470			9,823			16,412		16,659
Expenses:
Interest and fees on notes payable		879			575			1,658		1,261
Salaries and benefits		2,938			3,303			5,979		6,145
Provision for loan and impairment losses		22			(56	)		22		(22	)
Occupancy, data processing, communication and other		1,226			1,189			2,225		2,570
Minority interest		(17	)		66			9		73

Total		5,048			5,077			9,893		10,027

Operating contribution before direct taxes	$	2,422		$	4,746		$	6,519	$	6,632

Operating contribution, net of direct taxes	$	2,424		$	4,636		$	6,467	$	6,413

Consumer Lending:
Revenues:
Equity in earnings of investment	$	5,118		$	2,716		$	10,155	$	3,577
Other		19			—			22		—

Total		5,137			2,716			10,177		3,577
Expenses:
Interest and fees on notes payable		532			93			1,417		188
Occupancy, data processing, communication and other		1			6			4		12
Minority interest		1,023			543			2,029		715

Total		1,556			642			3,450		915

Operating contribution before direct taxes	$	3,581		$	2,074		$	6,727	$	2,662

Operating contribution, net of direct taxes	$	3,182		$	2,052		$	6,300	$	2,627

Total operating contribution, net of direct taxes	$	5,606		$	6,688		$	12,767	$	9,040

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Corporate Overhead:
Corporate interest expense	$	1,026	$	1,188	$	2,026	$	2,360
Salaries and benefits, occupancy, professional and other income and expenses, net		1,031		1,263		2,343		2,462

Earnings from continuing operations	$	3,549	$	4,237	$	8,398	$	4,218

All of the revenues from the consumer lending segment are attributable to domestic operations. Revenues from the Portfolio Asset acquisition and resolution segment are attributable to domestic and foreign operations as follows:


	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2004		2003		2004		2003
Domestic	$	4,185	$	5,387	$	8,328	$	9,794
Latin America		2,265		3,795		4,862		5,220
Europe		1,020		641		3,222		1,645

Total	$	7,470	$	9,823	$	16,412	$	16,659

Total assets for each of the segments and a reconciliation to total assets is as follows:


	June 30,		December 31,
	2004		2003
Cash	$	3,823	$	2,745
Portfolio acquisition and resolution assets
Domestic		53,355		42,872
Latin America		18,788		14,468
Europe		19,828		23,088
Consumer assets		25,824		15,685
Deferred tax asset, net		20,101		20,101
Other non-earning assets, net		13,696		7,030
Net assets of discontinued operations		5,527		6,150

Total assets	$	160,942	$	132,139

(9) Income Taxes

Federal income taxes are provided at a 35% rate. The Company has substantial net operating loss carryforwards for federal income tax purposes (“NOLs”), which can be used to offset the tax liability associated with the Company’s pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

(10) Commitments and Contingencies

Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

In connection with the transactions contemplated by the Securities Purchase Agreement, effective August 1, 2000, Consumer Corp. and FirstCity Funding LP (“Funding LP”) contributed all of the assets utilized in the operations of the automobile finance operation to Drive pursuant to the terms of a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the “Contribution Agreements”). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements.

In addition, in the Securities Purchase Agreement, the Company, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the “Closing Date”) with respect to tax-related representations and warranties and for thirty months from the Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $.25 million and then only for the amount by which such losses exceed $.25 million; however this limitation will not apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements.

The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. Management of the Company currently does not believe it is likely that FirstCity will be required to make payments on these indemnification agreements.

FirstCity is obligated to pay Bank of Scotland an arrangement fee related to the $16 million loan equal to 20% of all proceeds and other amounts paid to FirstCity from any sale or other disposition (regardless of when such sale or other disposition occurs) of, and of all dividends and other distributions paid to FirstCity by Drive or its general partner (regardless of when such dividend or other distribution occurs) on a 20% interest in Drive, in each case in excess of $16 million in the aggregate. An equal amount of loan discount (included in other assets) and participation liability (included in other liabilities) is recorded based on the estimated amount of this contingent fee. The loan discount is amortized into interest expense over the remaining term of the loan. At June 30, 2004, the estimated liability for this contingent fee was $7.5 million. Additionally, amortization of $1.2 million was recognized during the first six months of 2004. The Company currently estimates that additional interest expense will be recognized in the amount of $.4 million per quarter through December 2007. This additional interest expense currently has no impact on the Company’s cash flow. The interest will not be paid and any gain or income resulting from any sale or distribution will not be recognized until a sale occurs or distributions are received that exceed $16 million in the aggregate.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of assets or single assets (collectively referred to as “Portfolio Assets”). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries. FirstCity also has an equity investment in Drive Financial Services LP (“Drive”). Drive is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers.

During the second quarter of 2004 the Company recorded earnings to common stockholders on a diluted basis of $3.3 million or $.28 per common share. The operating contribution from the Portfolio Asset Acquisition and Resolution segment was $2.4 million compared with $4.6 million for the same period in 2003. The Consumer segment and its related investment in Drive generated $3.2 million in earnings contribution during the second quarter of 2004, an increase of $1.5 million over the second quarter of 2003.

The decreased earnings contribution from the Portfolio Asset Acquisition business of $2.2 million is primarily related to Mexican Peso exchange losses of $.7 million during the quarter when compared to gains of $1.1 million in the second quarter of 2003. Also, during the second quarter of 2003, FirstCity and several Acquisition Partnerships completed a loan sale, which resulted in $1.0 million of additional revenues to the Company.

The Company was able to invest $18.7 million in portfolio acquisitions of $86 million during the quarter of which $35 million was purchased in the U.S., $41 million in Mexico and $10 million in France.

The Company’s 31% investment in Drive generated $4.1 million for the quarter. After interest and other expenses, the net contribution was $3.2 million from the Consumer segment of the business.

Although the Company’s primary revenues are generated by the Portfolio Asset Acquisition and resolution business and the Company’s investment in Drive, other items such as interest expense and the effects of discontinued operations could have an impact on net income. During the second quarter 2004 corporate interest and overhead was down slightly when compared to the second quarter 2003 and provisions from discontinued operations were $250,000 in the second quarter 2004 compared to $420,000 in 2003. The Company received $123,000 and zero in cash flow from the residual interests during the second quarter of 2004 and 2003, respectively.

The Company’s financial results are affected by many factors including levels of and fluctuations in interest rates, fluctuations in the underlying values of real estate and other assets, the timing of and ability to liquidate assets, and the availability and prices for loans and assets acquired in all of the Company’s businesses. The Company’s business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company’s access to capital markets, including the securitization markets.

As a result of the significant period to period fluctuations in the revenues and earnings and losses of the Company’s Portfolio Asset acquisition and resolution business, period to period comparisons of the Company’s results of continuing operations may not be meaningful.

Components of the results for the three months and six months ended June 30, 2004 and 2003, respectively, are detailed below (dollars in thousands except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Portfolio Asset Acquisition and Resolution	$	2,424		$	4,636		$	6,467		$	6,413
Consumer		3,182			2,052			6,300			2,627
Corporate interest		(1,026	)		(1,188	)		(2,026	)		(2,360	)
Corporate overhead		(1,031	)		(1,263	)		(2,343	)		(2,462	)

Earnings from continuing operations		3,549			4,237			8,398			4,218
Accrued preferred dividends		—			(67	)		—			(133	)
Loss from discontinued operations		(250	)		(420	)		(250	)		(420	)

Net earnings to common stockholders	$	3,299		$	3,750		$	8,148		$	3,665

Diluted earnings per common share	$	0.28		$	0.33		$	0.69		$	0.33

Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this Quarterly Report on Form 10-Q.

Second Quarter 2004 Compared to Second Quarter 2003

The Company reported net earnings of $3.3 million in the second quarter of 2004 compared to earnings of $3.8 million in the second quarter of 2003. On a per share basis, diluted net earnings to common stockholders were $.28 in the second quarter of 2004 compared to earnings of $.33 in the second quarter of 2003.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolution segment was $2.4 million in the second quarter of 2004 compared to $4.6 million in the second quarter of 2003. FirstCity purchased $85.8 million of Portfolio Assets during the second quarter of 2004 ($81.0 million through Acquisition Partnerships), compared to $32.2 million in the second quarter of 2003. The quarter end investment in wholly owned Portfolio Assets increased to $11.2 million from $5.9 million at June 30, 2004 and 2003, respectively, as a result of recent acquisitions.

Servicing fee revenues. Servicing fee revenues decreased by 9% to $3.7 million in the second quarter of 2004 from $4.1 million in the second quarter of 2003. Service fees from domestic Partnerships decreased $.3 million. In June 2003, FirstCity and several Acquisition Partnerships completed a loan sale of performing and non-performing Portfolio Assets with a carrying value of $8.3 million for proceeds of $10.0 million, resulting in $.3 million of additional service fees.

Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets decreased from $.3 million in the second quarter of 2003 to $.2 million in the second quarter of 2004 as a result of higher collections received on one non-performing Portfolio in 2003.

Equity in earnings of investments. Equity in earnings of Acquisition Partnerships decreased 39% to $2.5 million in the second quarter of 2004 compared to $4.1 million in the second quarter of 2003. Following is a discussion of equity earnings by geographic region. See note 7 for summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

• Domestic — Equity in earnings of domestic Acquisition Partnerships decreased 20% to $2.6 million in the second quarter of 2004 from $3.3 million in 2003 primarily due to a bulk loan sale in 2003, which generated an additional $.7 million in equity earnings.

• Latin America — Equity in losses of Mexican Acquisition Partnerships were $.9 million in the second quarter of 2004 compared to equity in earnings of $.4 million in 2003. These partnerships reflected net losses of $9.4 million in the second quarter of 2004 compared to earnings of $4.8 million in 2003. Approximately $17 million of the earnings in 2003 were due to foreign exchange gains recognized by the partnerships. In the second quarter of 2004, the partnerships recorded $8.5 million of foreign exchange losses. In addition, $2.7 million of interest expense was recorded in the second quarter of 2004 compared to

$12 million in 2003. This interest is owed to affiliates of the investors in these partnerships, of which FirstCity recorded $.5 million and $.9 million, respectively, as interest income.

• Europe — Equity in earnings of Acquisition Partnerships located in France increased 72% to $.8 million in the second quarter of 2004 from $.5 million in 2003. This increase is principally due to the addition of three French Partnerships during 2003, which accounted for $.3 million in equity in earnings in 2004. During the second quarter of 2004, FirstCity also recorded $.2 million in foreign currency transactions gains (included in other expenses) relating to investments in France.

Interest income. Interest income decreased 37% from $1.1 million in the second quarter of 2003 to $.7 million in the second quarter of 2004. This decrease is primarily due to the Acquisition Partnerships and their lenders amending three loan agreements with Acquisition Partnerships located in Mexico in the third quarter of 2003 to provide for no interest to be payable with respect to periods after the effective date of the amendments. This change had no impact on the consolidated net earnings, as the effect is offset through equity earnings in these Partnerships.

Other income. Other income increased 58% to $.3 million in the second quarter of 2004 from $.2 million in the second quarter of 2003 primarily as a result of reimbursements of due diligence expenses, which will vary from period to period.

Expenses. Operating expenses were $5.0 million in the second quarter of 2004 compared to $5.1 million in 2003.

Interest and fees on notes payable increased 53% from $.6 million in the second quarter of 2003 to $.9 million in 2004. The average debt for the quarter increased from $25.3 million in the second quarter of 2003 to $39.7 million in the second quarter of 2004. The average cost of borrowing decreased from 9.1% in the second quarter of 2003 to 8.9% in the second quarter of 2004.

Salaries and benefits decreased $.4 million or 11% to $2.9 million in the second quarter of 2004 from $3.3 million in 2003. Total personnel within the Portfolio Asset acquisition and resolution segment were 204 and 236 at June 30, 2004 and 2003, respectively.

The provision for loan and impairment losses was minimal in the second quarter of 2004. The Company recorded a net credit of $56,000 to provision for loan and impairment losses in the second quarter of 2003 due to a $61,000 recovery on one real estate Portfolio.

Impairment on performing Portfolio Assets is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans’ risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. Impairment on nonperforming Portfolios is evaluated by analyzing the expected future cash flows from the underlying assets within each Portfolio. The expected future cash flows are reviewed monthly and adjusted as deemed necessary. Changes in various factors including, but not limited to, economic conditions, deterioration of collateral values, deterioration in the borrower’s financial condition and other conditions described in the risk factors discussed later in this document, could have a negative impact on the estimated future cash flows of the Portfolio. Significant decreases in estimated future cash flows can reduce a Portfolio’s present value to below the Company’s carrying value of that Portfolio, causing impairment.

For real estate Portfolios, the evaluation of impairment is determined quarterly based on the review of the estimated future cash receipts less estimated costs to sell, which represents the net realizable value of the real estate Portfolio. A valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified.

There were no provisions recorded on loans receivable from Acquisition Partnerships during the second quarter of 2004 and 2003. The loans receivable from Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by affiliates of the investors in the partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

Occupancy, data processing, communication and other expenses was flat from period to period.

Minority interest expense was minimal from period to period.

Consumer Lending

FirstCity’s consumer lending segment consists of the Company’s net investment in Drive. The operating contribution for the second quarter of 2004 was $3.2 million compared to $2.1 million during the second quarter of 2003.

Equity in earnings of investment. FirstCity recorded equity in earnings of Drive, net of minority interest, of $4.1 million in the second quarter of 2004 compared to $2.2 million in 2003. Drive recorded net income of $13.2 million in the second quarter of 2004 compared to $7 million in the second quarter of 2003. Drive’s inventory of retail installment contracts has grown from $511 million at June 30, 2003 to $861 million at June 30, 2004. Consequently, net interest margin after provision for credit losses and impairments at Drive rose from $21.0 million to $29 million during the second quarter of 2003 and 2004, respectively.

Interest and fees on notes payable. Interest and fees on notes payable increased from $93,000 in the second quarter of 2003 to $.5 million in 2004. During the second quarter of 2004, FirstCity recorded $.4 million of additional interest expense related to the contingent fee arrangement with the Bank of Scotland. See note 10 of the consolidated financial statements for further discussion of this contingent fee.

Other Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to any one of the Company’s businesses discussed above.

Corporate interest and overhead. Company level interest expense decreased by 14% to $1.0 million in the second quarter of 2004 from $1.2 million in the second quarter of 2003. Average debt declined to $41.0 million in the second quarter of 2004 from $47.2 million in 2003. Also, beginning with the third quarter of 2003, dividends on the New Preferred Stock are included in corporate interest expense. Other corporate overhead expenses decreased 18% to $1.0 million in the second quarter of 2004 from $1.3 million in 2003 primarily due to decreased salaries and benefits.

Income taxes. Provision for income taxes was $.5 million in the second quarter of 2004 and related primarily to federal alternative minimum taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that are available to the Company. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the second quarters of 2004 and 2003.

Discontinued Operations. The Company recorded a provision of $.3 million in the second quarter of 2004 for additional losses from discontinued operations compared to $.4 million in 2003. The additional provisions primarily relate to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts is partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions have increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. As the securities “run off,” assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

First Six Months of 2004 Compared to First Six Months of 2003

The Company reported earnings from continuing operations of $8.4 million in the first six months of 2004. Net earnings to common stockholders were $8.1 million in the first six months of 2004 compared to $3.7 million in the first six months of 2003. On a per share basis, diluted net earnings to common stockholders were $.69 in the first six months of 2004 compared to $.33 in the first six months of 2003.

Portfolio Asset Acquisition and Resolution

The operating contribution in the first six months of 2004 was $6.5 million compared to $6.4 million for the same period last year. FirstCity purchased $92.5 million of Portfolio Assets during the first six months of 2004 ($85.0 through Acquisition Partnerships), compared to $32.2 million in acquisitions in the first six months of 2003. FirstCity’s investment in these acquisitions was $21.8

million and $11.4 million in the first six months of 2004 and 2003, respectively. FirstCity’s quarter end investment in wholly-owned Portfolio Assets increased to $11.2 million from $5.9 million at June 30, 2004 and 2003, respectively.

Servicing fee revenues. Servicing fee revenues decreased 11% from $7.6 million in the first six months of 2003 to $6.7 million in 2004. Service fees from the Mexican partnerships decreased $.5 million or 10% as a result of efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from the domestic Acquisition Partnerships decreased from $2.6 million in the first six months of 2003 to $2.3 million in 2004. In June 2003, FirstCity and several Acquisition Partnerships completed a loan sale of performing and non-performing Portfolio Assets with a carrying value of $8.3 million for proceeds of $10.0 million, resulting in $.3 million of service fees.

Gain on resolution of Portfolio Assets. The net gain on resolution of Portfolio Assets decreased from $1.0 million in the first six months of 2003 to $.2 million in the first six months of 2004 primarily due to one non-performing Portfolio generating proceeds of $2.7 million and a net gain of $.5 million during 2003.

Equity in earnings of investments. Equity in earnings of Acquisition Partnerships increased 23.6% to $6.3 million in the first six months of 2004 compared to $5.1 million in the first six months of 2003. Following is a discussion of equity earnings by geographic region. See note 7 for summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

• Domestic — Equity in earnings of domestic Acquisition Partnerships decreased 19% to $4.5 million in the first six months of 2004 from $5.6 million in 2003 primarily as a result of a loan sale completed during the second quarter of 2003, which resulted in $.7 million of additional equity earnings to the Company.

• Latin America — Equity in loss of Mexican Acquisition Partnerships was $.8 million in the first six months of 2004 compared to $1.7 million in 2003. These partnerships reflected a loss of $5.7 million in the first six months of 2004 compared to $26.7 million in 2003. The partnerships recorded foreign exchange losses of $2.0 million in the first six months of 2004 compared to $6.1 million in 2003. Interest expense of $4.8 million and $24.8 million were recorded during the first six months of 2004 and 2003, respectively. This interest is owed to the investors of these partnerships, of which FirstCity recorded $.9 million and $1.7 million, respectively, as interest income. Excluding effects of foreign currency transactions and interest expense, these partnerships reflected adjusted net earnings of $1.1 million in the first six months of 2004 compared to $4.2 million in 2003.

• Europe — Equity in earnings of Acquisition Partnerships located in France increased to $2.6 million in the first six months of 2004 compared to $1.2 million in 2003. This increase is principally due to the addition of three French Partnerships, which accounted for $1.4 million in equity earnings in 2004. During the first six months of 2004, FirstCity also recorded $.6 million in foreign currency transaction gains (included in other expenses) relating to investments in France.

Interest income. Interest income decreased 45% from $2.2 million in the first six months of 2003 to $1.2 million in the first six months of 2004. This decrease is primarily due to the Acquisition Partnerships and their lenders amending three loan agreements with Acquisition Partnerships located in Mexico in the third quarter of 2003 to provide for no interest to be payable with respect to periods after the effective date of the amendments. This change had no impact on the consolidated net earnings, as the effect is offset through equity earnings in these Partnerships.

Other income. Other income was $1.4 million in the first six months of 2004 compared to $.5 million in 2003. In the first Quarter of 2004, FirstCity reduced the estimated carrying value of loans payable to certain members of management by $.8 million. See further discussion related to these loans in note 2 of the consolidated financial statements.

Expenses. Operating expenses were $9.9 million in the first six months of 2004 compared to $10.0 million in 2003.

Interest and fees on notes payable increased 31% to $1.7 million in the first six months of 2004 from $1.3 million in 2003. The average debt for the period increased to $35.0 million in the first six months of 2004 from $26.3 million in the first six months of 2003.

Salaries and benefits decreased $.2 million, or 3%. Total personnel within the Portfolio Asset acquisition and resolution segment were 204 and 236 at June 30, 2004 and 2003, respectively.

The provision for loan and impairment losses was minimal in the first six months of 2004. The Company recorded a net credit of $22,000 to provision for loan and impairment losses in the first six months of 2003 due to a $61,000 recovery on one real estate Portfolio.

Occupancy, data processing, communication and other expenses declined 13% from $2.6 million in the first six months of 2003 to $2.2 million in 2004 primarily due to increased foreign currency gains recorded in 2004.

Minority interest expense increased was minimal from period to period.

Consumer Lending

FirstCity’s consumer lending segment consists of the Company’s net investment in Drive. The operating contribution for the first six months of 2004 was $6.3 million compared to $2.6 million during the first six months of 2003.

Equity in earnings of investment. FirstCity recorded equity in earnings of Drive, net of minority interest, of $8.1 million in the first six months of 2004 compared to $2.9 million in 2003. Drive recorded net income of $26.2 million in the first six months of 2004 compared to $9.5 million in the first six months of 2003. Drive’s inventory of retail installment contracts has grown from $511 million at June 30, 2003 to $861 million at June 30, 2004. Consequently, net interest margin after provision for credit losses and impairments at Drive rose from $38.7 million to $56.7 million during the first six months of 2003 and 2004, respectively.

Interest and fees on notes payable. Interest and fees on notes payable increased from $.2 in the first six months of 2003 to $1.4 million in 2004. During the first six months of 2004, FirstCity recorded $1.2 million of additional interest expense related to the contingent fee arrangement with the Bank of Scotland. See note 10 of the consolidated financial statements for further discussion of this contingent fee.

Other Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to any one of the Company’s businesses discussed above.

Corporate interest and overhead. Company level interest expense decreased by 14% to $2.0 million in the first six months of 2004 from $2.4 million in the first six months of 2003. Average debt declined to $41.0 million in the first six months of 2004 from $46.9 million in 2003. Also, beginning with the third quarter of 2003, dividends on the New Preferred Stock are included in corporate interest expense. Other corporate overhead expenses were flat from period to period.

Income taxes. Provision for income taxes was $.6 million in the first six months of 2004 and related primarily to federal alternative minimum taxes. Provision for income taxes was $.3 million in the first six months of 2003 and primarily related to state income taxes on FirstCity’s servicing operations in Minnesota, which began in April 2002. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the first six months of 2004 and 2003.

Discontinued Operations. The Company recorded a provision of $250,000 in the first six months of 2004 for additional losses from discontinued operations compared to $420,000 in 2003. The additional provisions primarily relate to a decrease in the estimated future gross cash receipts on residual interests in securitizations. These securities are in “run-off,” and the Company is contractually obligated to service these assets. The assumptions used in the valuation model consider both industry as well as the Company’s historical experience. The decrease in the estimated future gross cash receipts is partially a result of the actual losses exceeding the losses projected by the valuation model. In addition, prepayment assumptions have increased to take into consideration the lower market rates and higher than predicted actual prepayments over the past quarter. As the securities “run off,” assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

Financial Condition

Major changes in FirstCity’s financial position resulted from the following.

Consolidated assets of $160.9 million at June 30, 2004, were $28.8 million higher than that at December 31, 2003. During 2004, FirstCity invested $21.8 million in Portfolio Asset acquisitions through wholly-owned subsidiaries and Acquisition Partnerships. These purchases are the primary reason for the increase in Portfolio Assets ($6.7 million), Loans receivable ($3.0 million) and equity investments ($12.2 million).

Other assets increased $6.8 million primarily due to a $6.3 million deferred debt discount, net of $1.2 million amortization. In connection with a $16 million loan from Bank of Scotland secured by a 20% interest in Drive, FirstCity agreed to pay a contingent fee to Bank of Scotland equal to 20% of all amounts received by FirstCity upon any sale of the Company’s 20% interest in Drive or any receipt of distributions from Drive, once such payments exceed $16 million in the aggregate. An equal amount of estimated deferred debt discount and participation liability is recorded with the deferred debt discount being amortized into expense over the term of the loan. At June 30, 2004, the estimated liability for this contingent fee was $7.5 million and was included in other liabilities in the consolidated balance sheets.

Consolidated liabilities of $125.0 million at June 30, 2004, were $21.9 million higher than that at December 31, 2003. Total notes payable increased by $11.5 million primarily as a result of borrowings for FirstCity’s investment in portfolio purchases. Other liabilities increased $7.7 million primarily due to the $7.5 million contingent fee discussed above, and minority interest increased $2.5 million, relating primarily to earnings on Drive.

Portfolio Asset Acquisition and Resolution

Aggregate acquisitions by the Company are as follows (dollars in thousands):


	Purchase		FirstCity
	Price		Investment
First six months of 2004	$	92,520	$	21,832
Total 2003		129,192		22,944
Total 2002		171,769		16,717
Total 2001		224,927		24,319
Total 2000		394,927		22,140
Total 1999		210,799		11,203

The following table presents selected information regarding the revenues and expenses of the Company’s Portfolio Asset acquisition and resolution business:

Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Income from Portfolio Assets and Loans Receivable:
Average investment in Portfolio Assets and loans receivable:
Domestic	$	10,500		$	8,262		$	8,509		$	8,553
Latin America		16,770			14,816			15,284			14,877
Europe		1,426			1,001			1,805			715

Total	$	28,696		$	24,079		$	25,598		$	24,145

Income from Portfolio Assets and loans receivable:
Domestic	$	250		$	462		$	446		$	1,375
Latin America		537			855			913			1,733
Europe		17			17			43			17

Total	$	804		$	1,334		$	1,402		$	3,125

Average return (annualized):
Domestic		9.5	%		22.4	%		10.5	%		32.2	%
Latin America		12.8	%		23.1	%		11.9	%		23.3	%
Europe		4.8	%		6.8	%		4.8	%		4.8	%
Total		11.2	%		22.2	%		11.0	%		25.9	%
Servicing fee revenues:
Domestic partnerships:
$ Collected	$	31,085		$	40,644		$	57,438		$	64,694
Servicing fee revenue		1,223			1,541			2,261			2,582
Average servicing fee %		3.9	%		3.8	%		3.9	%		4.0	%
Latin American partnerships:
$ Collected	$	20,249		$	13,513		$	35,095		$	30,025
Servicing fee revenue		2,400			2,484			4,356			4,879
Average servicing fee %		11.9	%		18.4	%		12.4	%		16.2	%
Incentive service fees	$	93		$	61		$	131		$	132
Total Service Fees:
$ Collected	$	51,334		$	54,157		$	92,533		$	94,719
Servicing fee revenue		3,716			4,086			6,748			7,593
Average servicing fee %		7.2	%		7.5	%		7.3	%		8.0	%
Personnel:
Personnel expenses	$	2,938		$	3,303		$	5,979		$	6,145
Number of personnel (at period end):
Domestic		60			70
Mexico		144			166

Total		204			236

Interest expense:
Average debt	$	39,705		$	25,311		$	35,007		$	26,263
Interest expense		879			575			1,658			1,261
Average cost (annualized)		8.9	%		9.1	%		9.5	%		9.6	%

The following table presents selected information regarding the revenues and expenses of the Acquisition Partnerships:

Analysis of Selected Revenues and Expenses
Acquisition Partnerships


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues:
Gain on resolution of Portfolio Assets	$	22,140		$	22,245		$	42,709		$	43,234
Gross profit percentage on resolution of Portfolio Assets		35.0	%		36.7	%		34.0	%		36.6	%
Interest income	$	2,266		$	1,983		$	5,165		$	4,128
Other income		272			494			516			1,009
Interest expense(1):
Interest expense	$	4,460		$	14,063		$	8,203		$	28,549
Average cost (annualized)		5.1	%		15.0	%		4.7	%		14.6	%
Other expenses:
Service fees		4,865			4,966			8,798			9,441
Other operating costs		5,986			5,343			12,358			8,982
Foreign currency loss (gain)		8,547			(16,898	)		2,009			6,090
Income taxes		9			168			167			(733	)

Total other expenses (income)		19,407			(6,421	)		23,332			23,780

Net earnings (loss)	$	811		$	17,080		$	16,855		$	(3,958	)

Equity in earnings of Acquisition Partnerships	$	2,492		$	4,114		$	6,337		$	5,128
Equity in earnings of Servicing Entities		147			103			477			319

	$	2,639		$	4,217		$	6,814		$	5,447

(1)

Interest expense includes interest on loans to the Acquisition Partnerships located in Mexico from affiliates of the investor groups. The rates on all but three of these loans range from 15% to 20%. The average cost on debt excluding the Mexican Acquisition Partnerships was 6.3% and 5.6% for the three months ended June 30, 2004 and 2003, respectively. As noted above, in the third quarter of 2003, the Acquisition Partnerships and their lenders amended three loan agreements from Mexican Acquisition Partnerships to provide for no interest to be payable with respect to periods after the effective date of the amendment. This change had no impact on the consolidated net earnings as the effect is offset through equity earnings in these Partnerships.

Consumer Lending

FirstCity owns a 31% interest in Drive Financial Services L.P., a sub prime auto lending company. Drive originated $177.5 million of receivables during the second quarter of 2004 compared to $127.7 million in 2003. Defaults and losses were 20.00% and 10.65%, respectively, at June 30, 2004 compared to 21.46% and 11.07 %, respectively, at June 30, 2003. These statistics reflect the weakness in the economy in prior periods and the resulting impact on used car prices, although recent indicators reflect an upward trend in used car prices. Delinquencies were 17.28% at June 30, 2004, up from 6.00% for the same period last year as a result of a change in collections strategies, which in some instances will allow Drive to provide borrowers additional time to cure delinquencies rather than pursue immediate repossession.

Net income from Drive continues to be positive as originations and the volume of portfolio assets grow over time. Based on information provided by Drive, the Company expects that this positive trend will continue.

The following table details this trend (dollars in thousands):


							Income (Loss)
			Loan		Total		Before Provisions			Provisions			Net Income		FirstCity’s
	Originations		Inventory		Assets		on Residual Assets			on Residual Assets			(Loss)		31% Share
2004
2nd Quarter	$	177,549	$	861,461	$	1,074,036	$	13,211		$	—		$	13,211	$	4,095
1st Quarter		244,121		770,042		915,128		13,001			—			13,001		4,031
2003
4th Quarter		102,228		623,389		738,829		6,308	***		(2,087	)		4,221		1,308
3rd Quarter		128,688		577,974		700,760		9,132			(3,904	)		5,228		1,621
2nd Quarter		127,706		511,212		619,269		8,251			(1,240	)		7,011		2,173
1st Quarter		126,118		443,099		551,412		3,707			(1,217	)		2,490		689

*** Net of $3.7 million of additional provisions related to loans receivable.
Note: As of June 30, 2004 Drive holds on its balance sheet residual interests with a book value of $19.6 million compared with $45.3 million as of June 30, 2003.

The following table presents selected information regarding consumer lending:

Analysis of Selected Data
Consumer Lending


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Retail installment contracts acquired	$	177,549		$	127,706		$	421,670		$	253,825
Origination characteristics:
Face value to wholesale value		99.47	%		98.71	%		101.14	%		98.79	%
Weighted average coupon		21.18	%		21.04	%		21.13	%		20.97	%
Purchase discount (% of face value)		16.56	%		17.50	%		17.01	%		17.29	%
Servicing portfolio
Owned	$	192,809		$	277,031
Securitized		902,008			491,858

Total	$	1,094,817		$	768,889

Owned — number of contracts		16,917			23,464
Securitized — number of contracts		84,561			47,818

Total number of contracts		101,478			71,282

Defaults (% of original loan balance at time of default)		20.00	%		21.46	%
Net losses on defaults after recovery		10.65	%		11.07	%
Delinquencies (% of total serviced portfolio)		17.28	%		6.00	%

Provision for Income Taxes

The Company has substantial NOLs, which can be used to offset the tax liability associated with the Company’s pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

Liquidity and Capital Resources

preferred stock, and other investments by FirstCity. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company’s subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

In December 2002, FirstCity completed a recapitalization in which holders of New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million in cash. As a result, common equity was increased by $18.9 million. During the first quarter of 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of Common Stock and $50,000 in cash. FirstCity also recorded a $4 million gain in December 2002 from the release of its guaranty of Drive’s indebtedness to BoS(USA) Inc. (“BoS(USA)”). BoS(USA)’s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings Corporation held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and notes payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of incentive servicing fees related to certain Portfolios in Mexico. FirstCity valued the loans at the inception date using an imputed interest rate of 4.56% based on the Company’s cost of funds on that date. During the first quarter of 2004, the Company reduced the estimated carrying value of these loans based on an imputed interest rate of 6.94% and revised cash flow projections. FirstCity recorded the change in estimate of $.8 million to other income. At June 30, 2004, these notes had a combined balance of $.5 million and mature in December 2011. The Company evaluates the contingent amount of these outstanding notes on a quarterly basis and will make adjustments to the estimated liability as changes in estimated cash flows supporting these notes change.

As a part of the recapitalization, BoS(USA) provided a non-recourse loan in the amount of $16 million to FirstCity, which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity’s debt to the Bank of Scotland (together with BoS(USA), the “Senior Lenders”). The $16 million loan is secured by a 20% interest in Drive (64.51% of FirstCity’s remaining 31% interest in Drive) and other assets of Consumer Corp. as are necessary and only to the extent to allow the Senior Lenders to realize the security interest in the 20% interest in Drive. In connection with the $16 million loan, the Company agreed to pay a contingent fee to BoS (USA) Inc. equal to 20% of all amounts received by the Company upon any sale of the Company’s 20% interest in Drive or any receipt of distributions from Drive related to the 20% ownership interest, once such payments exceed $16 million in the aggregate. At June 30, 2004, the estimated liability for this contingent fee was $7.5 million. Additionally, amortization of $1.2 million was recognized during the first six months of 2004. The Company currently estimates that additional interest expense will be recognized in the amount of $.4 million per quarter through December 2007. This additional interest expense currently has no impact on the Company’s cash flow. The payment of the interest and any gain or income resulting from any sale or distribution will not be recognized until a sale occurs or distribution is received.

BoS(USA) has a warrant to purchase 425,000 shares of the Company’s voting Common Stock at $2.3125 per share. BoS(USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares under certain specific situations to retain its ability to acquire approximately 4.86% of the Company’s voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

The Company has a $35 million loan facility with CFSC Capital Corp. XXX, a subsidiary of Cargill. This facility is being used exclusively to provide equity in new Portfolio acquisitions in partnerships with Cargill and its affiliates and matures in March 2005. At June 30, 2004, approximately $24.9 million was outstanding under this facility.

Drive has a warehouse line of credit with BoS(USA), which provides borrowings up to $300 million. Drive’s obligation under this arrangement at June 30, 2004 was $120.7 million. The debt is secured by Drive’s retail installment contracts and has been extended to February 2005.

Drive also has a warehouse line of credit agreement with Variable Funding Capital Corporation, a subsidiary of Wachovia National Bank (formerly First Union National Bank), which provides borrowings up to $100 million. Drive’s obligation under the arrangement at June 30, 2004 was zero. The debt will be secured by Drive’s retail installment contracts and terminates September 2004.

The Company and each of its major operating subsidiaries have entered into one or more credit facilities to finance their respective operations. Each of the operating subsidiary credit facilities is nonrecourse to the Company. The Company has agreed to indemnify BoS(USA) for up to 31% of losses, which might arise as a result of agreements BoS(USA) executed as a sponsor in connection with the securitizations completed by Drive. The Company also agreed to provide support in connection with securitizations by Consumer Corp. and Drive prior to the acquisition by BoS(USA) of the interest in Drive in August 2000. Management of the Company currently does not believe it is likely that FirstCity will be required to make payments on these indemnification agreements.

Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships and the term and warehouse facilities of Drive, as of June 30, 2004, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $165 million and outstanding borrowings of $103 million.

Management believes that the loan facilities provided by the Senior Lenders, along with the liquidity from the Cargill Facility, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly owned portfolios, as well as sales of interests in equity investments, will allow the Company to meet its obligations as they come due during the next twelve months.

The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of August 5, 2004 and the outstanding borrowings under such facilities as of June 30, 2004.

Credit Facilities

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

August 5,

June 30,

2004

Interest Rate

Other Terms and Conditions

(Dollars in millions)

Corporate

Company Senior Facility:

Bank of Scotland revolving line of credit

LIBOR + 2.75%

Secured by the assets of

the Company, matures

December 2004

BoS(USA) Tranche I (Term)

Prime + 2.5%

Secured by the assets of

the Company, matures

December 2006

BoS(USA) Tranche II (Term)

Fixed at 8.77%

Secured by the assets of

the Company, matures

December 2007

Portfolio Asset Acquisition and Resolution

Bank of Scotland portfolio acquisition facility

LIBOR + 3.5%

Secured by the assets of

the Company, matures

November 2006

Cargill equity investment facility

Greater of 8.5% or

Acquisition facility for

LIBOR + 4.5%

the investment in future

Acquisition partnerships,

matures March 2005

Greenwhich Capital portfolio acquisition facility

—

LIBOR + 4.0%

Secured by Portfolio Assets purchased with the facility, matures September 2004

Central National Bank term facility

Bank prime + 0.50%

Secured by existing

Portfolio Assets, matures December 2004

Unsecured loans payable to

senior management

—

Rate based Corporate
average cost of funds

Matures December 2011

Consumer

Bank of Scotland term loan

LIBOR + 1.0%

Secured by 20% equity

interest in Drive, matures

December 2007,

non-recourse

Total

165

103

Unconsolidated Acquisition Partnerships Term Facilities(1)

116

Various rates

Secured by Portfolio

Assets, various maturities

($11 million due in 2004),

non-recourse

Credit Facilities

Funded and

Unfunded

Outstanding

Commitment

Borrowings

Amount as of

as of

August 5,

June 30,

2004

Interest Rate

Other Terms and Conditions

(Dollars in millions)

Unconsolidated Drive

BoS(USA) warehouse facility

300

121

Prime minus .75%

Secured by warehouse

inventory, matures February

2005

Variable Funding Corp. warehouse facility

100

—

Rate based on

Secured by warehouse

Commercial paper

inventory, matures

rates combined with

September 2004

certain facility

fees

Bonds payable

812

Fixed at 1.47 % to 4.14%

Secured by retail

installment Contracts,

various maturities through

October 2010

Subordinate capital facility

Fixed at 16%

Secured by all assets of

Drive, matures February

2006

1,277

987

(1)

In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Mexican Acquisition Partnerships also have term debt of approximately $251 million outstanding as of June 30, 2004 owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $17.7 million as Loans Receivable on the Consolidated Balance Sheets.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the performance of the Company’s subsidiaries and affiliates; the availability of Portfolio Assets; assumptions underlying Portfolio asset performance; risks associated with foreign operations; currency exchange rate fluctuations; interest rate risk; the degree to which the Company is leveraged; the Company’s continued need for financing; availability of the Company’s credit facilities; the impact of certain covenants in loan agreements of the Company and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; uncertainties of any litigation that might arise from discontinued operations; general economic conditions; foreign social and economic conditions; changes (legislative and otherwise) in the asset securitization industry; fluctuations in residential and commercial real estate values; capital market conditions, including the markets for asset-backed securities; factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, filed March 30, 2004 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other Securities and Exchange Commission filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company’s operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company’s ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates.

The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the loan assets. Furthermore, these pools of assets are held for sale, not for investment; therefore, the disposition strategy is to liquidate these assets as quickly as possible.

Loans receivable consist of investment loans made to Acquisition Partnerships and bear interest at predominately fixed rates. The collectibility of these loans is directly related to the underlying Portfolio Assets of those Acquisition Partnerships, which are non-performing in nature. Therefore, changes in benchmark rates would have minimal effect on the collectibility of these loans.

The Company’s equity investment in Drive is materially impacted by net interest margins and the ability to securitize the loans Drive originates. During 2002, Drive elected not to use gain on sale treatment when assets were securitized. Instead, Drive pursued a strategy to grow the balance sheet and record interest income from loans and interest expense on the related debt as incurred to build an earnings stream over time. Demand from potential investors in Drive’s securitizations is affected by the perception of credit quality and prepayment risk associated with the loans Drive originates and securitizes. The timing and size and interest rates of the bonds issued as a part of the securitizations could also have a material effect on the net income of Drive. Interest rates offered to customers also affect prices paid for loans. These rates are determined by review of competitors’ rate offerings to the public and current prices being paid to Drive for the products. Drive does not hedge these price risks.

Drive’s residual interests in securitizations represent the present value of the excess cash flows Drive expects to receive over the life of the underlying sub-prime automobile loans. The sub-prime automobile residual interests are affected less by prepayment speeds due to the shorter term of the underlying assets and the fact that the loans are fixed rate, generally at the highest rate allowable by law.

In summary, Drive would be negatively impacted by rising interest rates and declining prices of its sub-prime loans. Rising interest rates would negatively impact the value of residual interests in securitizations currently held and costs of borrowings under the warehouse lines and new secured financings. Declining prices of the Company’s sub-prime loans would adversely affect the levels of gains achieved in the event Drive elects to sell those loans. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates or declining prices. There have been no material changes in the quantitative and qualitative risks of the Company since December 31, 2003.

The Company currently has investments in Europe and Latin America. In Europe, the Company’s investments are in the form of equity and represent a significant portion of the Company’s total equity investments. FirstCity also has a Euro-denominated loan receivable from a French Acquisition Partnership. As of June 30, 2004, one U.S. dollar equaled .83 Euros. A sharp change of the Euro relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. A 5% and 10% incremental depreciation of the Euro would result in an estimated decline in the valuation of the Company’s equity investments in France of approximately $.7 million and $1.3 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations. As discussed above, on March 31, 2004, the Company amended its acquisition term loan facility with the Senior Lenders to allow loans to be made in Euros up to a maximum amount in Euros that is equivalent to $22.5 million U.S. dollars. In June 2004, FirstCity borrowed 7.0 million Euros under this facility to refinance the outstanding balance of U.S. Dollar denominated loans it had with Cargill related to the acquisition of European portfolios. Management of the Company feels that this amended loan agreement will help reduce the risk of adverse effects of currency changes on Euro-denominated investments.

In Latin America, approximately 95% of the Company’s investments are made through U.S. dollar denominated loans to Acquisition Partnerships in Mexico. The remaining investment is in the form of equity in these same Acquisition Partnerships. The loans receivable are required to be repaid in U.S. dollars. Although the U.S. dollar balance of these loans will not change due to a change in the Mexican peso, the future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus could affect the overall total returns to the Company on these investments. As of June 30, 2004, one U.S. dollar equaled 11.45 Mexican pesos. A 5% and 10% incremental depreciation of the peso would result in an estimated decline in the valuation of the Company’s total investments in Mexico of approximately $1.4 million and $2.8 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of management’s evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

FirstCity was not involved in any material legal proceedings as of June 30, 2004.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

None

Item 3. Defaults Upon Senior Securities.

In the first quarter of 1999, dividends on the Company’s adjusting rate preferred stock were suspended. At June 30, 2004, accumulated dividends in arrears on such preferred stock totaled $1.3 million, or $10.50 per share. The accumulated dividends in arrears were paid on July 29, 2004 to the holders of record as of July 22, 2004. The dividend covered the period from July 1, 1999 through June 30, 2004. Because the dividend was in excess of 25% of the value of the New Preferred Stock, the ex dividend date for the security was July 30, 2004, the day after the payable date.

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.


Exhibit
Number		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill


Exhibit
Number		Description of Exhibit
		Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.2	—	Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

4.1	—	Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

9.1	—	Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

10.1	—	Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).

10.2	—	Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).

10.3	—	First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).

10.4	—	Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company’s Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999).

10.5	—	Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999).

10.6	—	Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by


Exhibit
Number		Description of Exhibit
		reference to Exhibit 10.40 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.7	—	Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.8	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.9	—	Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.10	—	Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.11	—	Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.12	—	Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.13	—	Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.14	—	Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002).

10.15	—	Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland. (incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).

10.16	—	Amended and Restated Loan Agreement, dated December 12,


Exhibit
Number		Description of Exhibit
		2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated April 15, 2003).

10.17	—	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).

10.18	—	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.18 of the Company’s Form 10-Q dated May 14, 2004).

10.19	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).

10.20	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).

31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

32.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

Filed herewith.

(b) Reports on Form 8-K.

None filed.

INDEX TO EXHIBITS


Exhibit
Number		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.2	—	Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

4.1	—	Certificate of Designations of the New Preferred Stock ($0.01 par value) of the Company. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

9.1	—	Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial Services Corporation. (incorporated herein by reference to Exhibit 9.1 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission on March 26, 1998).

10.1	—	Note Agreement, dated as of June 6, 1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust Company of California, N.A. (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-K dated March 24, 1998 filed with the Commission March 26, 1998).

10.2	—	Loan Agreement, dated April 8, 1998 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.6 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).

10.3	—	First Amendment to Loan Agreement, dated July 20, 1998, between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.7 of the Company’s Form 10-Q dated August 14, 1998, filed with the Commission on August 18, 1998).

10.4	—	Tenth Amendment to Loan Agreement, dated August 11, 1999 between Bank of Scotland and the Company (incorporated herein by reference to Exhibit 10.34 of the Company’s Form 10-Q dated August 16, 1999, filed with the Commission on August 16, 1999).

10.5	—	Amended and Restated Loan Agreement, dated December 20, 1999, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank


Exhibit
Number		Description of Exhibit
		of Scotland as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 22, 1999, filed with the Commission on December 28, 1999).

10.6	—	Securities Purchase Agreement, dated as of August 18, 2000, by and among the Company, Consumer Corp., Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein by reference to Exhibit 10.40 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.7	—	Contribution and Assumption Agreement by and between Consumer Corp. and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.41 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.8	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.9	—	Second Amendment to Amended and Restated Loan Agreement, dated December 20, 1999, by and among the Company, as borrower, and the Lenders, as lenders, and Bank of Scotland, as Agent. (incorporated herein by reference to Exhibit 10.43 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.10	—	Receivables Financing Agreement, dated August 18, 2000, among Drive BOS LP, Drive Financial Services LP, each Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 10.44 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.11	—	Amendment to Loan Agreement and extension of Promissory Note, dated January 12, 2001, by and between FirstCity Holdings Corporation and CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit 10.45 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.12	—	Second Amendment, dated as of February 16, 2001, to the Receivables Financing Agreement, dated as of August 18, 2000, among Drive BOS LP, Drive Financial Services LP the Lenders party thereto, IPA Incorporated and Wells Fargo Bank Minnesota, NA (incorporated herein by reference to Exhibit 10.46 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.13	—	Subordinate Capital Loan Agreement, dated as of February 16, 2001, among Drive Financial Services LP, DRIVE BOS LP, the financial institutions from time to time party hereto and IFA Incorporated (incorporated herein by reference to Exhibit 10.47 of the Company’s Form 10-K dated April 13, 2001, filed with the Commission on April 13, 2001).

10.14	—	Amended and Restated Amendment #4 (Option and Option Warrant), dated as of December 31, 2001, between the Company and BoS(USA) Inc. (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 18, 2002, filed with the Commission on January 18, 2002).

10.15	—	Letter Agreement, dated November 26, 2002, between FirstCity Consumer Lending Corporation and The Governor and Company of the Bank of Scotland, including Form of Promissory Note to be executed by FirstCity Consumer Lending Corporation, payable to The Governor and Company of the Bank of Scotland.


Exhibit
Number		Description of Exhibit
		(incorporated herein by reference to Exhibit 99(d)(5) of the Company’s Form SC TO-I/A dated November 27, 2002, filed with the Commission on November 27, 2002).

10.16	—	Amended and Restated Loan Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-K dated April 15, 2003).

10.17	—	Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders Named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-K dated April 15, 2003).

10.18	—	Fifth amendment, dated March 31, 2004, to the Term Loan and Revolving Credit Agreement, dated December 12, 2002, by and among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders and Bank of Scotland as Agent (incorporated herein by reference to Exhibit 10.18 of the Company’s Form 10-Q dated May 14, 2004).

10.19	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).

10.20	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.18 of the Company’s Form 10-Q dated May 14, 2004).

31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

32.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

* Filed herewith.


	Firstcity Financial Corporation

	By:	/s/ James T. Sartain

			James T. Sartain
			President and Chief Executive
			Officer and Director
			(Duly authorized officer of the
			Registrant)

	By:	/s/ J. Bryan Baker

			J. Bryan Baker
			Senior Vice President and Chief
			Financial Officer
			(Duly authorized officer and
			principal financial and accounting
			officer of the Registrant)

Dated: August 13, 2004

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